Concept Of Customer's Surplus

Statement of the Concept

The value which a customer pays for a product is forever fewer than what he is willing to
pay for it so that the contentment which he acquires from its purchase is more than the
value paid for it and thus he gains a surplus contentment which Marshall calls Customer's
Surplus (CS). Marshall defines as "The excess of the value which he would be willing to pay
rather than go without the thing, over that which he actually does pay, is the economic
compute of the surplus satisfaction."

The Marshallian gauge of customer's surplus is overwhelmed with several hitches due to idealistic
postulations of the utility study. But the two basic postulations which underlie the principle of
customer's surplus are that utility is quantitatively measurable and marginal utility of money
remains invariable. The method of gauge customer's surplus with the aid of the indifference curve
technique is superior to Marshallian gauging. We are going to pact the two formulations specified
by Hicks.

1. The Marshallian gauge with Invariable Marginal Utility of Money

At first, Hicks gauging the Marshallian customer's surplus with invariable MU of money in terms of the
indifference curve study. Money is gauged along the vertical axis and commodity A along the horizontal
axis. Presume the budget line of the customer is XY. Its incline equals the value of commodity 'A' presuming
that the value of one unit of money is equal to -

Given the value of commodity 'A', the customer is in equilibrium at Point M where the indifference curve
I2 is tangent to the budget line XY. At this point M, he has combination of OS amount of commodity 'A'
and OR of money. He thus expends RX of his earnings in buying OS amount of 'A'.

In order to determine the sum of money the customer is keen to expend for OS amount of commodity 'A'
relatively than go without it, we sketch an indifference curve I1 from point X which is vertically
parallel to the indifference curve I2 at point K as shown by the dotted lines drawn parallel to the
line XY. Thus the two curves have the same incline at OS amount of 'A'.

The indifference curve I1 demonstrates that the customer is equipped to expend LX amount of money for
OS amount of A. But in veracity he expends RX on trading the same amount of 'A'. Hence LX-RX = LR = KM
is the customer's surplus.

It may be eminent that Marshall alleged invariable MU of money in his concept and to make clear his gauge,
Hicks believed vertically parallel indifference curves. Thus when the inclines of indifference curves I1
and I2 at points K and M are equal; the postulation of invariable MU of money is satisfied.

2. The Marshallian gauge with Diminishing MU of Money

Primarily the customer is in equilibrium at Point M when his budget line XY is tangent to the
indifference curve I3. The customer expends RX money to get OS of 'A'. In rank to discover the amount
of money which the customer would be keen to expend on the same amount OS of commodity 'A' relatively
than go without it, we have to construct an indifference curve I2 through X. This curve surpass through
the line MS at point K where its slope is flatter than the slope of the curve I3 at point M.

It proves deteriorating MU of money. The customer is ready to expend LX amount of money for OS amount of
'A'. Thus the customer's surplus is LX - RX = LR = KM.

To compare Hicks' gauge with Marshall's, we have to construct an indifference curve I1 through X which
is vertically parallel to the curve I3 at Point C on the line MS. This is lucid from the dotted line
parallel to the line XY. This illustrates reliability of invariable MU of money.

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